May 23, 2010

A new study released by the Georgetown Center for Business and Public Policy looks at how broadband pricing plans that recover a greater share of costs from the heaviest users, including high-bandwidth consuming content providers, would help the United States achieve universal broadband adoption sooner and accelerate the end of a digital divide across income, racial and ethnic lines. The study found that such a digital divide should end before the end of this decade, if Internet Service Providers (ISPs) apply flexible pricing strategies.

The paper, by economists Robert J. Shapiro, Former Under Secretary of Commerce for Economic Affairs, and Senior Fellow at the Georgetown University Center for Business and Public Policy, and Kevin A. Hassett, Director of Economic Studies at the American Enterprise Institute, notes that the exploding demand for bandwidth, primarily from video applications, will require that the ISPs invest several hundred billion dollars to expand the broadband infrastructure. The study also finds that the pricing approaches used to fund those investments could largely determine the pace of broadband adoption over the next decade. The study utilizes findings from the FCC's National Broadband Plan to update an earlier analysis released last fall.

"Pricing models that recover costs equally, on a per-household basis to all subscribers, will substantially slow adoption," Shapiro and Hassett find. "However, a more flexible pricing model that recovers a greater share of these additional costs from high-bandwidth consumers or content providers would keep most subscribers' fee low and facilitate broadband adoption by all groups of Americans. Under this model, effective universal adoption should be achieved by all racial and ethnic groups by 2018 or 2019."

Shapiro and Hassett say pricing models are critical, because price is the largest factor determining whether a household subscribes to broadband. They observe that given the additional investments required to accommodate fast-rising demand for bandwidth and to avoid Internet congestion, the prevailing flat-fee pricing plans which charge the same fee for both modest and very heavy use of bandwidth will slow how fast lower-income Americans subscribe to broadband services. The paper finds that under the flat-fee pricing approach, fewer than 85 percent of Americans will have home broadband service by the end of this decade - well short of the 100 percent goal set by President Obama. For African Americans and Hispanics, who account for a disproportionate share of lower-income households, adoption rates would be 82 and 83 percent, respectively, if the cost of additional investment is borne equally by all consumers.

"Small price increases for current broadband users, especially middle-income and high-income subscribers, are unlikely to drive them back to dial-up. However, higher prices may have a much larger impact on the Internet subscription choices of households currently without service or using dial-up. Moreover, the evidence suggests that lower-income households are particularly sensitive to higher broadband prices," the study says.

The paper assumes that high bandwidth users, whose bandwidth consumption is fueling the growth of infrastructure investment needs, are relatively insensitive to price increases. It also observes that if that assumption does not hold, the largest share of the additional infrastructure investment could be funded through higher fees from the heaviest bandwidth-consuming content providers.

According to Shapiro and Hassett, "The same narrowing differences in broadband adoption would occur if the 80 percent share of the additional investment is passed along in higher charges to bandwidth-intensive content or applications providers, rather than their consumers. Some such approach would be the most efficient way to ensure that very high-bandwidth users do not drive up the costs of basic broadband service for everyone else."

The authors argue that as a matter of national social policy, average users should not be required to subsidize high-bandwidth consumers and content providers, as they have to date.

"Government policy should protect the ability of ISPs to employ flexible pricing strategies and ensure that government does not, even inadvertently, effectively compel pricing practices that would perpetuate differences in broadband adoption by income, race or ethnicity," added Shapiro and Hassett.

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